LONDON–Britain’s banks are being cautioned by the Bank of England that they should take whatever steps are necessary to prepare their systems for negative interest rates.
The bank wants to be able to use the additional policy tool to encourage more lending.
As CUToday.info has reported earlier, in other countries where interest rates have gone negative—in which the central bank charges banks to hold deposits—software systems in some cases proved unable to handle the negative numbers.
In addition, as CUToday.info also reported here, many of Ireland’s credit unions have put deposit caps in place due to negative interest rates at some of the country’s largest banks.
Bank of England policymakers cautioned they were not trying to send a signal that rates would be cut to zero or lower imminently. The markets responded accordingly: The British pound and bond yields rose as traders pared back expectations for a future rate cut, the New York Times reported.
The Times noted the central bank’s monetary policy committee held interest rates at 0.1% and continued its asset-buying program at the same pace.
‘Months of Debate’
“For months, there has been a debate about whether the Bank of England could introduce negative interest rates as another mechanism to bolster the economy,” the Times reported. “A negative interest rate…would influence the other interest rates in the economy, for example, on loans to businesses and households. Lowering these rates would, in theory, encourage more borrowing and investment.”
After consulting with banks about whether it would be feasible to cut rates further, the Times reported the central bank found that most firms would need to make some changes to their systems and processes. Last week it asked the banks to begin making these changes and to prepare to implement a negative Bank Rate at any point after six months.